Recent Posts

Facebookannounced its earnings on
July 26 after the close of trading. Its share price fell 8.5% to
26.845 before the market close in the wake of Zynga's dismal report.
Facebook's own report raised questions, and shares fell 10.7% to
23.97 (as of this writing) in after-hours trading.

While Facebook claims 955 million active users, that doesn't
translate to protected revenues. Its sales increased to $1.18
billion, but it earned only 12 cents per share for the second
quarter of 2012. Facebook had a fourfold increase in marketing
costs and its operating margin declined to 43% from 53% last
year.

Analysts' Rosy Price Targets

ZeroHedge.com shows that
stock analysts--including analysts whose firms made handsome fees
for participating in Facebook's May 17th IPO--had recent average
price targets of $37.74 for Facebook. This is just below the IPO
price. Only one of 38 analysts had a sell recommendation on
Facebook.

How do these "analysts" justify a multiple that is higher than
95% of the stocks in the S&P 500? It seems that either
analysts are compromised, or they are painting overly optimistic
scenarios based on nothing more than hope. It's interesting that
their hopes are aligned with the hope some of their firms have
for future fees.

Over-Hyped IPO

After Facebook's May 17th IPO, I made a public bearish bet on
Facebook. I made a bet it would fall in value, or at least that
sentiment would turn negative. I took a profit on the bet in
June. If I had failed to monetize at a profit, I could have
called JPMorgan CEO Jamie Dimon to claim it was a hedge, since he
had the nerve to pull that one when he appeared before Congress
to explain billions of dollars in losses
on credit derivatives bets in his London CIO unit. (Dimon later
admitted it changed into something else, i.e., a bet.)

Facebook's IPO was emotion in motion. It seemed to me the pricing
was based on hot air. At the time Facebook had $3.7 B in annual
revenues of which 85% came from advertising, and it had only $1
billion in net income.

In my opinion, the game was to bring the IPO at an inflated value
and hope Facebook can acquire viable companies with its inflated
shares. It's a game of brinkmanship. The investment banks that
helped inflate Facebook's share price may stand to earn fees as
Facebook acquires other companies. Unfortunately, the fall in
value puts a damper on these plans.

On May 30, 2012, I discussed Facebook's inflated value with
Bloomberg TV:

You can also watch the video below for
more analysis on Facebook's first earnings report.